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Housing NZ dusts off bond-sale mechanism that will keep $2.9B of housing debt out of obegal

Tuesday 29th May 2018

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Housing New Zealand, which provides housing for New Zealanders in need, is expected to sell up to $1 billion of bonds this week, the first step in plans to borrow up to $2.9 billion in its own name to finance the government's public housing strategy.

ANZ Bank New Zealand and Westpac Banking Corp are leading the sale - a syndication of 5- and/or 7-year NZ dollar bonds. It aims to sell $1 billion by June 30, starting as soon as this week. HNZ has an AA+ debt rating with Standard & Poor's, the same as the Crown's, but doesn't come with an implicit government guarantee. The debt is likely to be keenly sought by institutional investors because the New Zealand market doesn't have many domestic issuers "at the high-quality end of the credit spectrum," Bank of New Zealand interest rate strategist Nick Smyth said in a note today.

Smyth speculated on whether Housing New Zealand would have to offer a premium over bonds sold by the comparatively similar Local Government Funding Agency (LGFA), which also has an AA+ rating but has more liquidity, with $7.8 billion of bonds issued on behalf of local authorities. Either way, HNZ can't borrow as cheaply as the government, based on recent LGFA sales. In May the LGFA sold $50 million of 2.75 percent April 2025 bonds at a weighted average yield of 3.42 percent. The government sold $20 million of the same maturity and coupon at a weighted average yield of 2.56 percent.

"They will be well sought-after," said Fergus McDonald, head of bonds and currency at Nikko Asset Management New Zealand which won the INFINZ Bond Manager of the Year award for 2018.

McDonald said that as a fund manager he is happy to receive whatever extra yield premium HNZ bonds offer compared with government bonds but as a taxpayer, "I would argue the government should really fund them via the Debt Management Office (DMO which issues government bonds and bills). Why pay that extra margin to the funds I look after. It's all about the optics but it still comes from the public sector."

On $1 billion of bonds, a 1 percent premium over government bond yields amounts to $10 million, "which would fund 20-30 state houses," he said.

The DMO declined to comment on the pricing of HNZ's bonds. Budget 2018 includes funding for a package of 6,400 public houses the government plans to build over the next four years, including $234 million of operating funding, the $2.9 billion HNZ is to borrow from third parties and a further $900 million that HNZ is to find from its operations. To allow HNZ to borrow more, the government increased the limit on HNZ's borrowing protocol to $3.05 billion from $1.08 billion. HNZ will issue bonds in its own right for the first time in about 20 years.

HNZ currently owns or manages 63,000 properties and in addition to its target of adding 6,400 homes over the next four years, it aims to renew about 75 percent of the housing stock over the next 20 years. BNZ's Smyth noted the plans to raise debt in its own name is "a break from the past; Housing New Zealand had previously borrowed from the NZDMO rather than issuing under its own name."

"Given the relative scarcity of high-quality domestic issuers in NZ and what is likely to be a healthy spread pick-up to the NZGB curve, we expect demand to be strong," Smyth said.

On May 17, Finance Minister Grant Robertson released Budget 2018 projecting growing budget surpluses on an operating balance before gains and losses basis. Stronger-than-expected tax revenue driven by a sturdy pace of economic growth underpins the outlook and fiscal assumptions and the decision to axe $7.9 billion of the previous administration's planned tax cuts has meant Robertson can ramp up spending over the next four years while holding the increase in net core Crown debt to less than $7 billion.


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